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Delaware Chancery Refuses To Apply Ferengi Principles To Low Income Housing Deals



There have been two important opinions in the Low Income Housing Tax Credit Year 15 struggle so far this month. Both favor not-for-profit (NFP) sponsors. They each deserve their own post, so today we will start with JER Hudson GP XXI LLC which came down May 2 from Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery. First a little bit of background, which you can skip if you are familiar with the issue.

The Year 15 Problem

The major source of funding for affordable housing in this country is the LIHTC – Section 42 of the Internal Revenue Code. States are apportioned credits based on population. A specified agency in each state then parcels out the credits to projects. NFP sponsors have an edge in the allocation process.

Typically the credit will be allocated to an investor limited partner, often a bank that is getting Community Reinvestment Act good dooby points in addition to the return from the credit. The credit is doled out over ten years and subject to recapture for an additional five years. There is a requirement for the property to remain affordable for an additional 15 years, but that is enforced by the state agencies not the IRS.

Section 42 allows for not for profits sponsors to have a right of first refusal (ROFR) to purchase the property for a bargain price at the end of the 15 year compliance period. Many deals are underwritten on the assumption that the ROFR price will take the investor out after year 15.

Lately investors, some of whom have acquired their interest after the credits have been exhausted are not cooperating with the ROFR process and are looking for an additional return that in the view of the NFP sponsors they are not entitled to. In general NFP sponsors have been doing well in state courts and the court of public opinion. Overall the investor interests, sometimes referred to as aggregators have been winning in federal court.


The Case

JER Hudson presents an unusual fact pattern. At issue was Kate’s Trace, a 108 unit project in Newport News, Virginia, owned by Kate’s Trace Limited Partnership (KTLP). Hudson Housing Tax Credit Fund XXI LP (The Fund) held the limited partnership interest in KTLP through a LLC . JER is the general partner of the the Fund. They are the plaintiffs in the case. DLE Investors LP (DLE) is a limited partner in the Fund.

The Fund started in 2002. DLE became a limited partner in the Fund in 2007. Sometime between 2007 and 2020 ownership of DLE changed. When DLE became a partner in 2007, projections indicated that there would be tax credits flowing, but that there would not be much in the way of residuals as the expectation was that NFP sponsors would acquire the properties under the bargain ROFR terms.

The new owners of DLE, Hunt Capital Partners, didn’t see it that way. They tried to convince the GP to buy them out at a premium. When the sponsor of KTLP acquired the Newport News property at the bargain ROFR price, the GP, on advice of counsel, decided to take no action. DLE was not happy with that and sought to remove the GP under the terms of the partnership agreement.

So the GP brought the action to challenge the removal. DLE asserted counterclaims for breach of fiduciary duty, breach of contract and declaratory judgement that the removal was valid.

Enough Is Never Enough

There is little doubt that if Chancellor Zurn were a Ferengi, that DLE would have prevailed in this case in accordance with Rule 97 of the Ferengi Rules of Acquisition Enough is never enough. The opinion outlines some of the bickering that went on between the JER and DLE including DLE refusing to consent to a refinancing unless some of the proceeds were used to buy them out. It was the NFP sponsor NHT Communities that ended up triggering the litigation even though it was not directly involved in it.

In the spring of 2021, NHT and the KTLP general partner started taking the steps to transfer the property under the terms of the ROFR to an affiliated NFP. I will spare you the details. It was a done deal when they informed JER. JER sought advice from law firm Holland & Knight about whether the transfer was proper and whether they could do anything about it.

Based on the advice of H&K, JER, the Fund GP, decided not to spend any of the Fund’s remaining $200,000 in reserve funds engaging in futile resistance to the ROFR exercise. DLE responded to that easy going approach with “You’re fired”.

The Opinion

The essence of Chancellor Zurn’s opinion was that the purpose of the Fund was to reap tax credits and the GP had no duty to try to squeeze more out of the deal. Chancellor Zurn wrote:

At the risk of straying from my task, I will share that I do not believe that a failure to sue over an improperly exercised ROFR can cause a material adverse effect on the Fund after the Compliance Period. As explained, Fund GP’s duties to safeguard the funds and assets of the Fund encompass the Property Partnership Interests and cash reserves, but not the Property itself. As explained, Fund GP is authorized and charged to protect those interests only as consistent with the purpose of the Fund. And as explained, under that purpose, the Fund’s Property Partnership Interests have always been valued as sunsetting with a ROFR disposition. Because the partners understand and intend the Property Partnership Interests will terminate with a ROFR disposition, it seems to me that an improperly exercised ROFR does not change the value of the Fund’s Property Partnership Interests, and so cannot constitute a material adverse event on the Fund. Consequently, failure to correct or rescind an improperly exercised ROFR would be exculpated due to the absence of a material adverse effect on the Fund.


David Davenport is an attorney who has been involved in numerous ROFR cases. He was not directly involved in this litigation, but rather represented the NFP sponsor. He is quite enthusiastic about the opinion.

The written decision was issued earlier this week and represents a scathing acknowledgment and indictment of Aggregators and their misconduct throughout the LIHTC industry. It is an extremely lengthy, detailed, and thorough decision, with more than 350 supporting citations to various other cases, articles, treatises, and sources. ………………………

The Court found that the Hudson Fund GP’s mission was to preserve the Kate’s Trace property as affordable housing under the LIHTC program through a ROFR execution, and the Fund’s course of conduct through the end of the Property’s Compliance Period was consistent with its stated purpose. That purpose was an exchange of investor dollars for tax credits and the original investors exiting the Fund once the tax credits were distributed. The Court further found significant that, fundamentally, the Fund is a LIHTC partnership and its source of value and reason for formation is to participate in the LIHTC program, and the ROFR is a feature of the program that is meant to extend the property’s viability as affordable housing beyond the Compliance Period.

I understand Mr. Davenport’s enthusiasm, but this situation is pretty limited in its applicability. The lesson to aggregators is probably that they need to get control of the GP interests in funds or find GPs who will play ball with them. On the other hand, the opinion does endorse the views of NFP sponsors. And it endorses an “Enough is enough” view of responsible business behavior.


An industry insider told me that what has created this problem is a long period of low capitalization rates that were not anticipated when the projects were underwritten. I tend to think that this sort of thing is an inevitable byproduct of using the tax code as an instrument of social policy. Capitalism hates the commons as we learn from watching Mr. Potter and George Bailey every Christmas.

Other Coverage

Jeff Montgomery has Chancery Nixes Investor Suit To Force Subsidized Apt. Saleon Law 360. The piece is behind a paywall so I don’t know if there is a pun intended referring to Nixon Peabody which represented DEL.

Beth Healy has Courts are handing setbacks to Nixon Peabody clients seeking control of affordable housing on WBUR. This follows coverage in September on the firm’s role in representing aggregators.

Here is a roundup of my coverage of the issue.


Bonds See 2023 Recession, Stocks Aren’t So Sure



The yield curve is one of the most robust recession predictors and has signaled a recession may be coming since mid 2022. In contrast, U.S. stocks as measured by the S&P 500 are up materially from the lows of last October and only just below year-to-date highs, seemingly rejecting recession fears. Yet, fixed income markets see the Fed potentially cutting rates by the summer, perhaps reacting to a U.S. recession.

The Evidence From The Bond Markets

The recessionary evidence, at least from fixed income markets, is mounting. The 10 yield Treasury yield has been below the 2 year yield consistently since last July. That is is called an inverted yield curve and has signaled a recession fairly reliably when compared to other leading indicators.

Building on that, fixed income markets see almost a nine in ten chance that the Federal Reserve cuts rates by September of this year. That’s something the Fed has repeatedly said they won’t do on their current forecasts. Yet, a recession could cause it to happen.

The Stock Market

In contrast, the stock market shows some optimism. The S&P 500 is up 7% year-to-date as the market has shrugged off fears of contagion from recent banking issues. In particular, tech stocks have rallied.

In contrast, more defensive sectors such as healthcare, utilities and consumer goods have lagged in 2023. This suggests that the stock market is taking more of a ‘risk on’ position and is perhaps less worried about the economy.


That said the stock market is a leading indicator of the business cycle, it may be that stocks see a recession, but are now looking past it to growth ahead and are factoring in the lower discount rates that a recession might bring as interest rates decline. Also, the U.S. stock market is relatively global, so the fate of the U.S. economy is a key factor in driving profits, but not the only one.

What’s Next?

Monitoring unemployment data will be key. Though the yield curve is a good long-term forecaster of recessions it is less precise in signaling when a recession starts. Unemployment rates can offer more accurate recession timing. Unemployment edged up in February, suggesting a recession may be near, but we’ve also seen monthly noise unemployment. Two similar monthly unemployment spikes during 2022 both proved false alarms.

However, if we see a sustained move up in unemployment from the low levels of 2022 that may be a relatively clear sign that a recession is here. Economist Claudia Sahm estimates that a sustained 0.5% increase in unemployment rate from 12-month lows is sufficient to trigger a recession. Unemployment rose 0.2% from January to February 2023, so maybe we’re on the way there. Of course, the jobs market performed better than expected in 2022 and it could do so again. Still, fixed income markets do suggest a 2023 recession is coming. Stock markets don’t necessarily share that view.

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Which States Have The Highest And Lowest Life Expectancies?



There’s a wide variance of life expectancies among the 50 states in the U.S., according to a recent report prepared by Assurance, an insurance technology platform that helps consumers with decisions related to insurance and financial well-being.

Figure 1 below shows the 10 states with the highest life expectancy, starting with Hawaii, the state with the highest life expectancy.

Figure 2 below shows the 10 states with the lowest life expectancy, starting with Mississippi, the state with the lowest life expectancy.

Assurance scoured life expectancy data prepared in January 2023 by the U.S. Centers for Disease Control and Prevention (CDC). With this data, Assurance created several easy-to-understand graphics that offer information about life expectancies.

Life expectancies are a basic measure of well-being

As measured by the CDC, life expectancies are a basic measurement of well-being in a broad population and not a prediction of how long an individual might live. The CDC measures the expected lifespan for a person born in the year of measurement. This measurement is calculated based on the assumption that the individual will live and die according to the rates of death that are prevalent in the measurement year for each age. There’s no assumed improvement or backsliding in the assumed mortality rates in future years for each age in the life expectancy calculation.


By contrast, an estimated lifespan for an individual would consider their current age, their gender, and some basic lifestyle information. It might also attempt to project future improvements or backsliding in mortality rates based on key factors.

Significant influences on life expectancy calculations

Leading causes of death in the U.S. are heart disease, cancer, and accidents in that order. These immediate causes are significantly influenced by factors in the population such as poverty rates, educational attainment, rates of obesity and smoking, access to healthcare, prevalence of violent crime, and the support people receive from federal, state, and local governments. All these factors can vary widely among different states, which can be a key reason why life expectancies vary by state.

When you think about it, all these factors also have the potential to influence a person’s quality of life. The measured life expectancy rate rolls up all these factors into one objective measurement of well-being that’s based on population data.

In addition to the factors listed above, mortality rates increased and life expectancies decreased in the past few years due to the Covid-19 pandemic. A recent article titled “Live Free And Die” summarized recent research results that show that life expectancies in most countries around the world rebounded after the Covid-19 pandemic but that they continued to decline in the United States. Many of the reasons cited in the article for the continued decline in U.S. life expectancies are the same or similar to the factors listed above.

NPR‘Live free and die?’ The sad state of U.S. life expectancy

Why should retirees care about the life expectancies reported here if these measures don’t predict your own lifespan? Life expectancy calculations indicate the general well-being of the entire population in your area. While the living conditions in your area can influence your own lifespan and quality of life, retirees should focus on their remaining life expectancy given their age. They should also consider how the factors listed above that influence life expectancies in the population might apply to them.

You can obtain customized estimates of your remaining life expectancy at the Actuaries Longevity Illustrator. Part of your planning for retirement is understanding how long you an an individual might live, instead of relying on generalized information about larger populations you see in the media.

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IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’



Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its “Dirty Dozen” campaign, the IRS has renewed a warning about so-called Offer in Compromise “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collective excessive fees.

Dirty Dozen

The “Dirty Dozen” is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.

(You can read about other schemes on the list this year—including aggressive ERC grabs here, phishing/smishing scams here and charitable ploys here.)

Tax Debt Resolution Schemes

“Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt,” said IRS Commissioner Danny Werfel.

“This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don’t qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees.”


Offers In Compromise

Legitimate is a key word. Offers in Compromise are an important program to help people who can’t pay to settle their federal tax debts. But, as the IRS notes, these “mills” can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don’t meet the qualifications, frequently costing taxpayers thousands of dollars.

An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don’t believe you owe the tax, you can’t pay the tax, or
 exceptional circumstances exist.

Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.

First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).

You’ll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month’s payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.

The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.


Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don’t, the IRS will return your offer.

Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.


You can probably tell—it’s a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.

By contrast, according to the IRS, an OIC “mill” will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person’s tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.

Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool.

“Pennies On A Dollar”

What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That’s why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.

The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.


While submitting an OIC may keep the IRS from calling you, it doesn’t stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.

You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.

Be Skeptical

An OIC is a serious effort to resolve tax debt and shouldn’t be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you’re considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.

MORE FROM FORBESIRS Urges Those Hoping To Help To Beware Of Scammers Using Fake Charities

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